Ex-Governor Of Hawaii Questions Use Of Law Firm

By LYNNLEY BROWNING and DAVID CAY JOHNSTON

Published: November 18, 2003

Correction Appended

A former governor of Hawaii who ordered an investigation into accusations of tax fraud by ChevronTexaco says he was unaware that the law firm hired to investigate had worked for the predecessors of the company, which the firm eventually cleared of wrongdoing.

The former governor, Benjamin J. Cayetano, said last week that the state should not have selected the law firm, Winston & Strawn of Chicago, because of what he termed a conflict of interest.

Last July, Winston & Strawn exonerated ChevronTexaco of accusations raised by two accounting professors that it had cheated federal and state coffers out of $3.25 billion in taxes, including $536 million to Hawaii, through a complex pricing method over 30 years involving a project in Indonesia.

The exoneration, which came seven months after Mr. Cayetano was voted out of office, prompted his successor, Gov. Linda Lingle, not to sue the oil company.

James R. Thompson, Winston & Strawn's chairman and managing partner, who is a former governor of Illinois, said he saw no conflict in the firm having represented Chevron and Texaco, which became ChevronTexaco in 2001, and in investigating the merged company for Hawaii. ''No. Zero,'' he said.

In documents outlining its qualifications to Hawaii's attorney general office, the law firm wrote in November 2002 that ''none of the work that we did for Chevron USA is related to the matters, facts or legal issues to be prosecuted here.'' The work concerned hedging transactions and the environment, it wrote.

But Jeffrey Gramlich, an accounting professor at the University of Southern Maine in Portland, and one of the two academics who asserted tax fraud by ChevronTexaco from 1970 to 2000, said Winston & Strawn had also represented Texaco on at least three cases, in the early to mid-1980's. Winston & Strawn did not mention those specific cases to the State of Hawaii.

Hugh Jones, an assistant attorney general under Mr. Cayetano's and Governor Lingle's administrations, said Winston & Strawn was selected from among a dozen contenders for what he termed its tax law experience.

Stephen Gillers, professor of legal ethics at New York University School of Law, said that Winston & Strawn was ''well within the clear.''

If the firm concludes that the two matters are unrelated, it can proceed without even informing the new client about the former client, especially when the previous work was so long ago, he said.

But Mr. Cayetano, who lost a bid for re-election one month after ordering the investigation, said he was upset about what he considered a conflict. Governor Lingle, who continued the inquiry, accepted campaign contributions from ChevronTexaco, according to The Honolulu Star-Bulletin.

Governor Lingle's appointed attorney general, Mark J. Bennett, once represented Chevron as a trial lawyer at a law firm in Honolulu. Mr. Bennett recused himself from the state's investigation with Winston & Strawn.

Mr. Cayetano turned over the process of selecting a law firm for the investigation to his attorney general, Earl I. Anzai. Mr. Anzai said last week that Winston & Strawn's previous work ''did not necessarily present a conflict of interest.''

In 1998, under Mr. Cayetano, Hawaii sued Chevron, Texaco and other oil companies for $2 billion, accusing them of price-fixing. The case was settled last January for $35 million.

Questions regarding Chevron's taxes were first raised by Internal Revenue Service auditors in San Francisco, where the company is based, who were examining the company's returns from 1979 through 1987. The audit was shut down by I.R.S. headquarters and Chevron paid $675 million to settle the dispute.

Winston & Strawn took the Hawaii case on a contingency basis. Because it argued against suing ChevronTexaco, the law firm said it was ultimately paid nothing by Hawaii for its work. The firm examined pricing at an Indonesian venture between Texaco and Chevron's Caltex unit.

In its joint report with the attorney general's office, Winston & Strawn concluded last July that Chevron owed Hawaii at most $3.65 million in unpaid taxes, a fraction of the amount asserted by the accounting professors. The report also said any transgressions took place over only three years.

Professor Gramlich and his colleague, a retired University of Michigan professor, James E. Wheeler, said the law firm misused certain data in ways that favored ChevronTexaco. In its investigation, Winston & Strawn obtained access to confidential documents, including tax returns, from ChevronTexaco. The law firm, the oil company and the state attorney general's office have declined to make the documents public.

Correction: November 20, 2003, Thursday An article in Business Day on Tuesday about the aftermath of an investigation into ChevronTexaco in Hawaii referred incorrectly to Ben Cayetano, the former governor, who raised objections about the state's choice of a law firm. He was prohibited from running again in 2002 because of term limits; he did not lose an election.